The two biggest success stories of FERC’s Office of Market Oversight and Investigations (OMOI) during its first year were a record $20 million civil penalty brought against Transcontinental Gas Pipe Line Corp. for engaging in marketing affiliate abuse, and a $1.7 billion settlement to resolve charges that El Paso Corp. drove up natural gas prices in California during the state’s energy crisis, said OMOI Director William F. Hederman last Tuesday.

In March, Transco entered into a settlement with the OMOI’s Division of Enforcement to pay $20 million — the largest penalty in the agency’s history — for violating laws and agency regulations that bar interstate natural gas pipelines from giving preferential treatment to marketing affiliates and other sister companies (see NGI, March 24). The fine eclipsed the previous agency record of $11 million set in 1991 in a case that also involved Houston-based Transco.

Within days of the Transco deal, El Paso announced it had reached a comprehensive settlement in principle to resolve all regulatory and legal actions related to the sale or delivery of gas and electricity to California and three other western states from September 1996 to the present. The cost of the settlement was pegged at almost $1.7 billion (see NGI, March 24).

In the Transco agreement, “most important to me are the strict compliance program and strict limits on new business going forward,” Hederman said at the Natural Gas Roundtable in Washington, DC. As for the El Paso-California pact, “the most important achievements…are El Paso’s commitments to expand capacity and provide future discounts to harmed customers.”

Although the OMOI staff had no direct role in the El Paso-California settlement negotiations, “we were the ones who kept the case alive” at the Federal Energy Regulatory Commission, Hederman told reporters. “Basically, at one point, the administrative law judge was ready to move forward [with the case], and the enforcement [staff] continued to raise issues there to keep the matter alive about the capacity allocation.”

FERC hasn’t seen the final El Paso-California settlement yet, Hederman said, but he indicated the agreement in principle “looks strong.” The 100-member OMOI staff includes attorneys, auditors/examiners and a number of former executives of energy companies, including Aquila, Columbia, Dominion Resources, Enron Corp., PG&E National Energy Group and the PJM Interconnection.

As for the hot-button issue of natural gas price indexes, Hederman said he “[was] proud of how we [OMOI] helped the industry move…a little faster than I think they might have on their own” on this issue. “This is more serious than you think.”

While he said “many of the worst [index] abuses probably are behind us,” he believes the biggest chore may lay ahead — “we’ve got to have indices that people are confident in.”

Regulators and the energy industry currently are examining a number of proposals to restore trust in the wake of charges brought against traders for manipulating existing energy price indexes, which are compiled and published by energy newsletters. Some have called for FERC to take over the task, while others have proposed that independent third parties step up to the plate.

FERC’s level of involvement in price indexes “should be as low as possible,” Hederman said. The Commission, however, must have an “opinion” on who or how the indexes are carried out in the future since “price indices get reference in the tariffs.”

For the agency to create and oversee a real-time price index, Hederman said that would require a “whole new order of magnitude of staff” at FERC. “That’s a major effort.”

Commission Chairman Pat Wood initially suggested that the Energy Information Administration (EIA) might be best suited for the job. But “the EIA quickly called the Commission and said ‘we don’t want to do it,” he noted.

On a separate issue, Hederman reported that the OMOI has been “closely tracking” gas storage. “The fill season is off to a slow start, and it will not be easy to make up for lost time and gas by the fall. Despite the current state of the cash market and future strip pricing, the gas market will need to get busy filling storage. Otherwise, even a moderately cold winter next year could lead to demands from Congress to investigate high prices and potential market manipulation.”

The overall gas supply situation is giving his office cause for concern, according to Hederman. He noted he participated in “sobering discussions” about U.S. and Canadian gas supplies during a workshop sponsored by The National Academies last week. To get through this without high gas prices, the market is going to need “some luck from the weather.”

Hederman said FERC will issue a public report on the cause of the gas price spikes that were experienced in February. “From everything we’ve seen, it appears to [have been] fundamentally driven.”

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